Golden Agri - Affected By Weaker Downstream Margins

We believe earnings would catch up in the following quarters on the back of stronger downstream margins. This is as feedstock prices are on a downward trend.

It expects to end the year with 15-20% YoY FFB growth, anticipating a growth moderation in the next few quarters.

We maintain our earnings estimates and NEUTRAL recommendation.

Our SGD0.39 TP (3% upside) is based on an unchanged 17x 2017 P/E target and implies an EV/ha of USD11,000/ha, in line with peers’ USD10,000-15,000/ha.

What's New

Golden Agri’s 1Q17 earnings came in at 18-19% of our and consensus FY17 forecasts.

While this may seem lower than normal, we highlight that management guided for higher margins for the downstream palm & laurics segment in the coming quarters, on the back of the reducing feedstock cost trend. As such, we believe earnings would catch up in the following quarters.

Briefing highlights:

Golden Agri saw a marked FFB output recovery of 29% YoY in 1Q17, although on a QoQ basis output fell 20%. For FY17, management continues to guide for a 15-20% YoY growth on the back of 9,829ha of land coming into maturity. It expects to see lower FFB growth in 2Q17 vs 1Q17 and a further moderation of growth in 2H17 from a higher base. As such, we maintain our 12% FFB growth forecast for now to be conservative;

Unit cost achieved in 1Q17 was USD302.00/tonne and management expects this level to remain so for the rest of the year;

It intends to replant 10,000ha of land in 2017 (2016: 7,300ha). However, only 400ha of replanting has been done in 1Q17, with the bulk of the remaining replanting to be completed in 2H17;

Golden Agri saw a reduction in its palm & laurics margin to 2.1% in 1Q17 (4Q16: 2.5%, 1Q16: 4.9%). It hopes to be able to see higher margins for the rest of the year, ie 2-3% on the back of lower feedstock costs;

Golden Agri continues to participate in the biodiesel programme, with an allocation of c.100,000 kilolitres in May-October (Nov 2016-Apr 2017: c.80,000 kilolitres). The increased allocation is based on its increasing capacity of 600,000 tonnes pa by end-2Q17. This is with the commissioning of its second biodiesel plant (from 300,000 tonnes previously).

No change to forecasts.

We make no changes to our forecasts, as we expect earnings to catch up in the following quarters. This is on the back of higher FFB output as well as increased downstream margins.

Maintain NEUTRAL.

Our unchanged TP of SGD0.39 is based on 17x 2017F P/E and implies EV/ha of USD11,000. This is at the lower end of its peers’ range of USD10,000-20,000/ha.

Given its considerable sensitivity to CPO prices, we believe Golden Agri may not perform well in a downward-trending CPO price environment.

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